Training on Forecasting September 17–18

ACRA affirms AA-(RU) to the Chelyabinsk Region, outlook Positive

The credit rating of the Chelyabinsk Region (hereinafter, the Region) is based on a minimal level of the the Region's debt load and a very high liquidity of its budget. The rating is limited by per capita indicators of the regional economy, much lower than the national averages, as well as by a high share of mandatory budget expenditures. The credit rating outlook stems from possible stabilization of the operational balance at a high level, provided that the mandatory expenditures remain unchanged and the budget revenues are as planned in 2019.

The Chelyabinsk Region is located in the Ural Federal District. 3.5 mln people live in the Region, which is just over 2% of the Russian population. In 2017, the Region's GRP amounted to RUB 1.385 bln (about 2% of the aggregate GRP of Russian regions).

Key rating assessment factors

The level of credit risk is minimal. By late 2018, the ratio of debt to operational balance of the Region is expected to reach 0.34, while the debt service costs may amount to 1% of the operational balance. Refinancing risks are absent. In the the budget deficit planned for 2019 is financed by funds held on the Region's accounts, the debt load indicators will not change by the end-2019. According to ACRA estimates, in late 2018, the Region's debt will include budget loans (two thirds) and state guarantees (the rest). The ratio of debt to tax and non-tax revenues (TNTR) will not exceed 12%.

Tax revenues depend on the metals sector; budgetary policy is well-balanced. In 2017, for the first time in five years, the regional budget was executed with a surplus of 6.8% of TNTR. Based on the results of 10M2018, in 2018, the tax revenues are expected to increase by 18–19% y-o-y. Similar to most regions where tax revenues grow, the main contributor is income tax. According to the 9M2018 data from the Federal Tax Service, the positive dynamics is underpinned by the economic sector “Production of iron, steel and ferroalloys” (40% of income tax revenues for 10 months of 2018, a 70% increase y-o-y). The largest enterprises of the sector registered in the Region are PJSC “MMK” and PJSC “ChMK” (owned by PJSC “Mechel”). The increase in tax revenues from the sector is associated with a prolonged rally on the metals market. Therefore, ACRA expects that, in the conservative scenario, i.e. a complete application of budget expenditures (RUB 164 bln), the Region's budget will be deficit-free. Taking into account the proposed amendments concerning the regional budget expenditures, the surplus may exceed 3% of TNTR. ACRA expects that in 2018, the operational balance of the Region may increase to 29% of regular revenues, as compared to 24% in 2017. In the event that the Region is successful in restricting its mandatory expenditures and collecting revenues, the operational balance will not change in 2019.

See: For some – a trade war, for others – profits: Ferrous metals are resisting falling prices, maintaining the creditworthiness of the industry. Russian iron & steel industry: 2023 outlook

On the other hand, the 20% increase in the social policy expenditures planned for 2019 may again reduce the ratio of operational balance to regular revenues to the level seen in 2017. A gradual decline in metal prices projected by ACRA may make it difficult for the Region to ensure the 20% growth of income tax revenues in 2019. The Region's rating is restricted by these two risks. Nevertheless, ACRA notes that, historically, the growth rate of the mandatory expenditures of the Region was lower than the growth rate of regular income in the period under review.

High liquidity allows the Region to place temporarily free funds on deposits, thus increasing non-tax revenues. In 9M2018, such revenues amounted to 118% of the revenues in 2017. The monthly average amount of deposits by more than one and a half times exceeds the monthly average budget expenditures of the Region. As of December 01, 2018, the amount of deposited funds almost twice exceeded the debt of the Region (including guarantees issued).

Key assumptions

  • The Region will maintain its well-balanced budget policy, whereby the growth rates of expenditures (including current expenditures) do not exceed the growth rates of own revenues.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Stabilizing budget metrics at the level planned for 2018;
  • The Region’s GRP and personal incomes growing faster than the national averages.

A negative rating action may be prompted by:

  • Substantially decreasing operational balance and growing mandatory expenditures of the Region;
  • The Region's failure to collect taxes as planned for 2019 on the backdrop of impossibility to push down expenditures.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating assigned to the Chelyabinsk Region was first published by ACRA on December 26, 2017. The credit rating and credit rating outlook are expected to be revised within 182 days following the rating action date (December 21, 2018) in accordance with the Calendar of planned sovereign credit rating revisions and publications.

The credit rating was assigned based on the data provided by the Chelyabinsk Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit rating is solicited, and the Government of the Chelyabinsk Region participated in its assignment.

No material discrepancies between the data provided and the data officially disclosed by the Government of the Chelyabinsk Region in its financial report have been discovered.

ACRA provided additional services to the Government of the Chelyabinsk Region. No conflicts of interest were discovered in the course of credit rating assignment.

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